Summer Doldrums Coming to an End

The pattern of trading in precious metals changed for the better this week.
After London's bank holiday on Monday, for the first time in a long time the
market opened in London's pre-market with higher prices. This indicated Asian
or Middle-Eastern physical demand was returning to the market. Predictably,
prices drifted lower during London hours as paper trading took over, and all
the gains were more or less lost by close of play on Comex in New York.

It was a similar story on Wednesday. Yesterday, (Thursday) started the same
way, but this time the move gained more traction; but volumes remain pitifully
low, in common with open interest. Today this pattern was not repeated with
gold kicking off unchanged on overnight levels. However, gold is up $15 on
the week and feels more firmly based.

Measured by deliveries on the Shanghai Gold Exchange, Chinese demand is increasing,
with last week's figure rising to 46 tonnes, having increased every week in
August. So far this year over 1,200 tonnes have been delivered, and the extension
of trading and therefore potential demand into the Free Trade Zone is due to
kick off in September.

The chart of the gold price and open interest on Comex is shown below.

August is a notoriously poor trading month, with traders in the northern hemisphere
on holiday, or at least not thinking about markets. September is wake-up time,
and statistically the best month for gold. Will this be the pattern this year?

Trading in silver continues to be healthier, even if the price performance
has been disappointing, with the gold/silver ratio rising to 66 from 63 earlier
in the month. Open interest had its first significant fall on Wednesday, when
the price rose marginally. This suggests that on balance there is some bear
closing in futures. The action is shown in our next chart.

Could this be a harbinger of better times? Quite likely: being mostly an industrial
metal, there is some evidence that commercial users are locking in low prices
by holding futures positions. Bear in mind that two years ago, users probably
estimated silver prices at $35+ in their business plans, so current prices
for them are too good to miss.

Quick side-note: palladium continues to power ahead, having made all-time
highs consistently in recent months to challenge $900 this week.

PMs and the economic outlook

When it comes to the broader picture, the one chart that says it all is that
of the US 10-year Treasury bond.

This is the year when the US economy was supposed to recover: not according
to government bond yields. US 10-year Treasury yields slipped this week to
2.33%, and 30-year to 3.08%. The same story is evident elsewhere, notably in
the Eurozone and there is only one likely explanation: the advanced economies
are on the verge of an economic slump.

This matters for gold and therefore silver, because in such an event opinions
are divided over the outcome for prices. Banks, which are after all children
of paper currencies and credit, naturally think of government bonds as the
safest of safe havens. However, in the event of a global slump, we can expect
central banks to expand money supply as much as may be required to stop asset
prices falling. This transfers systemic risk from the banking system into currencies,
leaving gold and silver as the safest of safe havens.

Alasdair Macleod runs FinanceAndEconomics.org,
a website dedicated to sound money and demystifying finance and economics.
Alasdair has a background as a stockbroker, banker and economist. He is a
Senior Fellow at the GoldMoney
Foundation.

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